Overseas investors could shun Britain if the Government goes ahead with legislation to give officials the power to retrospectively block foreign acquisitions of key companies.
Ministers are reported to be mulling measures in the draft National Security and Investment Bill, which would allow officials to intervene in foreign takeovers of companies deemed to affect national security.
The development comes after concerns over Huawei’s role in setting up Britain’s 5G network, with fears about the Chinese telecoms firm’s links with the Beijing government.
Unveiling plans to protect the UK last year, the Government said it would strengthen controls by “adding conditions to a transaction or blocking the transaction as a last resort”.
Proposals are thought to include being able to go back to unwind deals that have completed - a prospect that sends out a dangerous message to foreign investors, according to experts.
It could mean the UK economy losing out on billions of dollars. Foreign direct investment into Britain topped $59bn (£45bn) last year.
According to the UN’s 2020 world investment report, this placed the UK eighth globally, and was down from $65bn in 2018 and $101bn the year before.
Ben Fletcher at lobby group Make UK said that while a tough stance could deliver some benefits to British industry, the detail of the proposed laws needed to be revealed.
He added: “However, if a retrospective element is introduced, there could be a real danger that a message would be sent out to the world that doing business with Britain carries an increased risk.”
Veronica Roberts, partner at law firm Herbert Smith Freehills, said: “A retrospective review could have a damaging impact on investor confidence in the UK.
“It is also unclear why the UK Government should need such a power. There exists a longstanding ability to intervene to review investments and acquisitions on national security grounds and [the Government] has already lowered the thresholds for review significantly in sectors of particular sensitivity, in 2018 and earlier this year.”
Several countries have tightened their rules on overseas investors in the past year following the clampdown on Huawei, but most regimes have not introduced powers to unwind deals that have already completed.
Allowing the state to review transactions after they have concluded “would risk making the UK look like an outlier and could well impact legitimate and welcome foreign investment as a result”, Ms Roberts said.
Lawyers said it was not clear if the retrospective powers under consideration would apply only to deals completed after any legislation has been passed, or whether deals completed prior to any new laws could also be unwound.
Alasdair Steele, a corporate partner at law firm CMS, said the latter option would be “highly unusual as it is generally recognised that parliament does not legislate retrospectively”.
He said: “While any constraint on investment is unwelcome to business, what investors and business will want to know as a priority is that they can have their deals pre-approved or cleared under the new regime and not be spending their futures looking back over their shoulders in case government subsequently decides to review a completed deal.”
Bringing in a retrospective law could further harm the UK’s international standing, which has already been damaged by the Government’s admissions that amending the Brexit withdrawal agreement would break international law in a “limited and specific way”.